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Policy Responses to the Post-bubble Adjustments in Japan: A Tentative Review

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  • Mori, Naruki

    (Bank of Japan)

  • Shiratsuka, Shigenori

    (Bank of Japan)

  • Taguchi, Hiroo

    (Bank of Japan)

Abstract

This paper provides a very tentative review of the monetary and prudential policy responses to the post-bubble adjustments in Japan. The adjustments after the collapse of the bubble have been prolonged due to (1) the rapid downward revision of the expected economic growth rate; (2) balance-sheet adjustments on the part of firms; and (3) the malfunctioning of the financial intermediary system stemming from its nonperforming-asset problem. We use four yardsticks, Marshallian k, Taylor rule, the equity yield spread, and the short-term real interest rate for assessing the monetary easing. The results suggest that the timing of policy reversal was swift and the magnitude of easing in the early phase could be viewed as broadly adequate for dealing with a normal business cycle. It is possible to argue that the effects of the bursting of the bubble might have not been sufficiently taken into account. It should be noted the outcome would not have differed greatly even if the drastic monetary easing that eventually took place had been decided at an earlier point in time without a fundamental cure of the nonperforming- asset problem. A considerable achievement of prudential policy in the period under review is that systemic risk was avoided with the cost being delayed in establishing a legal framework for handling troubled financial institutions and in organizing a comprehensive safety net. As a result of this delay, it took a long time to deal with the nonperforming- asset problem. This, in turn, posed a serious drag on the economy. Our preliminary conclusion about the lesson we should draw from this experience is the importance for the Bank of Japan of identifying the precise impacts of shocks on the economy as well as their transmission mechanism promptly and thereby minimizing adjustment costs. It should also be conducive for the Bank to address actively structural issues that may influence the effectiveness of its policy measures.

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Bibliographic Info

Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

Volume (Year): 19 (2001)
Issue (Month): S1 (February)
Pages: 53-102

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Handle: RePEc:ime:imemes:v:19:y:2001:i:s1:p:53-102

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Cited by:
  1. Maurice Obstfeld, 2009. "Time of Troubles: The Yen and Japan's Economy, 1985-2008," NBER Working Papers 14816, National Bureau of Economic Research, Inc.
  2. Chen, Nan-Kuang & Chu, Hsiao-Lei & Liu, Jin-Tan & Wang, Kuang-Hsien, 2006. "Collateral value, firm borrowing, and forbearance lending: an empirical study of Taiwan," Japan and the World Economy, Elsevier, vol. 18(1), pages 49-71, January.
  3. Anna Schwartz, 2003. "Asset price inflation and monetary policy," Atlantic Economic Journal, International Atlantic Economic Society, vol. 31(1), pages 1-14, March.
  4. R. Kato & S. Nishiyama, 2002. "Optimal Monetary Policy When Interest Rates are Bounded at Zero," Computing in Economics and Finance 2002 8, Society for Computational Economics.
  5. Taylor, John-B, 2001. "Low Inflation, Deflation, and Policies for Future Price Stability," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 35-51, February.
  6. Wako Watanabe, 2004. "Prudential Regulation, the Credit Crunch" and the Ineffectiveness of Monetary Policy: Evidence from Japan," ISER Discussion Paper 0617, Institute of Social and Economic Research, Osaka University.
  7. Andrew Filardo, 2004. "Monetary policy and asset price bubbles: calibrating the monetary policy trade-offs," BIS Working Papers 155, Bank for International Settlements.
  8. David Andolfatto, 2003. "Monetary Implications of the Hayashi-Prescott Hypothesis for Japan," Macroeconomics 0307008, EconWPA.
  9. Ippei Fujiwara, Naoko Hara, Naohisa Hirakata, Takeshi Kimura, and Shinichiro Watanabe, 2007. "Japanese Monetary Policy during the Collapse of the Bubble Economy: A View of Policymaking under Uncertainty," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 25(2), pages 89-128, November.
  10. Nan-Kuang Chen & Hsiao-Lei Chu, 2003. "Collateral value and forbearance lending," LSE Research Online Documents on Economics 20004, London School of Economics and Political Science, LSE Library.
  11. Bank for International Settlements, 2001. "The financial crisis in Japan during the 1990s: how the Bank of Japan responded and the lessons learnt," BIS Papers, Bank for International Settlements, number 06, 8.
  12. Agarwal, Sumit & Chomsisengphet, Souphala & Liu, Chunlin & Ghon Rhee, S., 2007. "Earnings management behaviors under different economic environments: Evidence from Japanese banks," International Review of Economics & Finance, Elsevier, vol. 16(3), pages 429-443.
  13. Morana, Claudio, 2004. "The Japanese stagnation: an assessment of the productivity slowdown hypothesis," Japan and the World Economy, Elsevier, vol. 16(2), pages 193-211, April.

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